Tax incentives to the capitalization of companies – new, improved and delayed

The 2023 State Budget Law introduced a regime that constitutes a refurbished version of the incentives to the capitalization of companies, also known as «ICE». In fact, such incentives were already in place, in the form of two distinct regimes, although to a lesser extent when compared to the now single regime under analysis.

The new ICE regime allows for the deduction to the taxable income of the eligible net capital increases which have occurred in the previous nine fiscal years, at the rate of 4.5%, or at a rate of 5% for micro, small and medium-sized companies, corresponding to the sum of the capital increases occurred in those nine previous fiscal years.

Such deduction is limited to (i) € 2M, or (ii) 30% of the EBITDA, whichever is higher. However, regarding (ii), if the total amount of eligible net capital increases surpasses that limit, the remainder may be deducted within the following five fiscal years, yet also subject to the abovementioned limits.

The concept of eligible capital increases encompasses contributions in cash, contributions in kind from conversion of credits into capital, share issuance premiums, profits which are applied to retained earnings or directly to reserves or capital increase. However, this legal regime refers to eligible net capital increases, which are simply the result of deducting the distribution of the reserves or retained earnings, as well as the outflows in cash or kind in favor of the shareholders by way of capital decrease or distribution of assets.

This regime offers a remarkable opportunity for companies to deduct their spending with increase in equity and its capitalization effort to a much greater extent than before, given the prior regime only allowed for a maximum deduction of circa € 140.000 per fiscal year, and was restricted to capital increases stricto sensu, whereas the new regime envelops the mere transfer of the annual profit to retained earnings or reserves, share issuance premiums, amongst other important realities.

Another important aspect to this new regime of tax incentives is that it is not subject to the limitation imposed by the CIT Code on tax benefits of 10% of the taxable income each fiscal year, meaning the deductions to be made by companies under ICE can be fully pursued without any quantitative limit other than the ones indicated above.

Therefore, the new ICE regime has a broader scope than the last, allows for larger deductions to the taxable income and is not subject to the limitation of the total amount of tax benefits employed by each company.

On the other hand, upon the approval of the new ICE regime, the Portuguese legislator revoked the two aforementioned regimes that were previously in place and which in some ways pursued the same goals as the ICE, the Deduction of Retained or Reinvested Profits (Dedução por Lucros Retidos e Reinvestidos – DLRR) and the Share Capital Remuneration (Remuneração Convencional do Capital Social – RCCS), which are no longer in place for the year 2023[1].

This comes as no surprise, as the new ICE is a very significant tax benefit covering most of the situations which were previously encompassed by these two other tax incentives.

However, regarding the commencement of the application of the new ICE regime, the legislator adopted a rather odd solution: this tax incentive will not be applicable in 2023, but only starting from 2024. Numbers 3 and 9 of Article 43-D of the Tax Benefits Code state that the ICE regime only applies to eligible net capital increases made in 2023 or after, which implies that as of 2023 (regarding the taxable income computed with respect to 2022), this regime will not be applied. On the other hand, due to the revocation of the DLRR incentive, for example, companies will also not be allowed to make use of it in 2023.

It is then rather curious (and relatively inexplicable) that such a delay was approved by the legislator, especially considering that no mention of such delay can be found in the original proposal, constituting a last-minute addition. It is unclear whether or not this was due to a poor choice of wording by the legislator, who may have not realized the impact it would have specifically in 2023. In any case, it is hard to make sense of this one-year desert during which companies cannot make use of neither the new ICE regime nor the previous (meanwhile revoked) DLRR tax incentive.

Alternatively, it may have been an elusive way of postponing to 2024 the tax expenditure that such regime may force upon the government, in other to mitigate the budgetary impact of the tax incentive.

Speculations (and critiques) aside, the new ICE regime appears to be a useful tool for all companies (and not only micro, small or medium sized companies) to benefit from a significant incentive to their capitalization strategies, with increased deductions and much less restrictive limitations, even though, apparently, and until the legislator provides some additional clarity on the time frame of the incentive, it may only be employed from 2024 onwards.

José Miguel Saraiva

May 2023


[1] Even though for capital contributions made until 31December 2022 companies can still make use of the RCCS regime.